Question

A subsidiary is completely liquidated with its corporate parent receiving all of the cash and property as part of the liquidation. The fair market value of the property exceeded its basis in the hands of the subsidiary by $10,000. How much gain will the subsidiary recognize on the liquidation?

Answer 1

The subsidiary will recognize a capital gain of $10,000, which is the difference between the fair market value of the property received and the basis of the property in the liquidation.

Step-by-step explanation:

When a subsidiary is liquidated and its assets exceed its liabilities, including the basis of its property, the subsidiary will recognize a gain on the liquidation. In the scenario described, the subsidiary's property has a fair market value that is $10,000 greater than its basis in the hands of the subsidiary. Thus, the subsidiary will recognize a capital gain of $10,000 as a result of the liquidation, which is the difference between the fair market value received and the basis of the property.